Leverage and Entrepreneurs

The big dilemma facing most seasoned entrepreneurs today is about leverage. the vc’s and other investors get plenty by making multiple bets within large funds. they can be reasonably confident that over their fund’s life they can deliver good returns and make good and sometimes obscene money. entrepreneurs have to make totally concentrated bets and wait several years to see if they pay off at all. this gets hard when the rest of your business school classmates seem to make as much in one year managing their hedge fund as you hope to as your final payout if it ever comes.

so where’s the leverage? well, you can try to start multiple companies but that is frought with landmines like the fact that over time companies will readjust equity to compensate current employees and investors so you can count that your equity will be highly diluted when you leave. also, you will inevitably dilute your attention to the winner by spreading it across a lot of losers.

you can try to raise a fund and start an incubator (and party like it’s 1999:). while this may be great for the investors who get to buy into your companies at founders prices, it is very hard to put a lot of capital to work and now you’ve reduced your payout to a carry across a relatively small number of bets (as compared to a vc fund).

you can join a vc fund. this seems to be the most popular route for successful entrepreneurs (most recently bill joy going to kp). for some people, this represents a kind of nice, easy retirement. they probably dont last in that business which gets more competitive as it gets more crowded. my problem with that (other than nobody inviting me to join:( is that i’d get frustrated with such a passive role (though some are notoriously not that passive:).